EMPCT Working Paper Series No. 2024-07
41 pages | PDF Download | PDF in Browser
Citation:
Bonadio,Barthélémy, Zhen Huo, Elliot Kang, Andrei A. Levchenko, Nitya Pandalai-Nayar, Hiroshi Toma, and Petia Topalova, “Playing with blocs: Quantifying decoupling” October, 2024
Barthélémy Bonadio
Andrei A. Levchenko
Petia Topalova
Zhen Huo
Nitya Pandalai-Nayar
Elliot Kang
Hiroshi Toma
Abstract
We adopt a data-driven approach to measure trade fragmentation over the period 2015-2023. We assign countries to the US bloc, the China bloc, or to an unaligned group based on whether their trade costs with the US and China increased or decreased over this period. We find that the US bloc and the China bloc each contain roughly a quarter of the countries in the world, with about half the countries remaining unaligned. However, we also find that as cross-bloc trade costs increased, within-bloc trade costs fell. We use a quantitative model to compute the real income effects of this reconfiguration of the global trade costs. The median country in the world, and the median country within each bloc, has 0.4-0.6% higher real income as a result of the observed decoupling, contrary to the widespread belief that fragmentation has been welfare-reducing. Finally, we find a modest amount of bloc misalignment: the median country in the US bloc would actually be better off in the China bloc, and vice versa. These results suggest that trade decoupling does not always
follow trade-driven economic interests.
